Chapter 7 Government Intervention in International Business

TRUE/FALSE QUESTIONS

MULTIPLE-CHOICE QUESTIONS
For each of the following choose the answer that most completely answers the question.

GOVERNMENT INTERVENTION

1. The purpose of protectionism is to protect ________.

a. domestic industries from foreign competitors
b. foreign firms from domestic competition
c. domestic exports from high production costs
d. foreign and domestic firms from labor unions
(a; pp. 194-195; concept; Learning Objective 1; moderate)

2. A quantitative restriction on specific imports for a set period of time is known by which of the
following terms?
a. tariff
b. quota
c. investment barrier
d. country risk
(b; p. 195; concept; Learning Objective 1; easy)

3. All of the following are country risks in international business except ________.
a. government bureaucracy
b. inadequate law enforcement
c. government mismanagement
d. currency exchange rate
(d; p. 195; concept; Learning Objective 1; moderate)

4. Which of the following is often a result of protectionist policies?

a. higher prices of domestic goods
b. lower prices of domestic goods
c. shortage of domestic goods
d. surplus of domestic goods
(a; p. 195; concept; Learning Objective 1; easy)

126
RATIONALE FOR GOVERNMENT INTERVENTION

5. Which of the following is a rationale for governments imposing offensive trade and investment
barriers?
a. the protection of domestic industries
b. the promotion of national security
c. the pursuit of public policy objectives
d. the support of special interests
(c; p. 196; concept; Learning Objective 2; moderate)

6. Advocates of government intervention in international trade argue that blocking imports will
________.
a. reduce manufacturing and distribution costs
b. protect home-country employment opportunities
c. encourage manufacturers to outsource jobs
d. limit intellectual property theft
(b; p. 197; concept; Learning Objective 2; moderate; AACSB: Analytic Skills)

7. Tariff-based trade barriers can benefit young domestic-based companies by ________.

a. allowing them time to expand and become competitive
b. providing them with government subsidies
c. instigating the growth of a solid infrastructure
d. generating domestic and international sales
(a; p. 197; concept; Learning Objective 2; difficult; AACSB: Analytic Skills)
8. Governments impose export controls for the purpose of ________.
a. improving available opportunities for domestic sales
b. limiting the number of exported products to certain countries
c. preventing the export of security-related products to specific nations
d. restricting the export of products to all nations during wartime
(c; p. 197; concept; Learning Objective 2; moderate)

9. Nations that initiate strategic policies for the development of high value-adding industries
often do all of the following except ________.
a. subsidize investments in high tech industries
b. invest in the public education system
c. encourage citizens to save money
d. fund large scale public works projects
(d; p. 198; concept; Learning Objective 2; moderate)

10. The Chinese governments policy of requiring foreign firms to enter the Chinese market via
joint ventures is intended to ________.
a. limit the amount of FDI
b. create jobs for Chinese workers
c. protect Chinas national security
d. stimulate foreign investment
(b; p. 198; concept; Learning Objective 2; moderate; AACSB: Analytic Skills)

127
WHAT ARE THE INSTRUMENTS OF INTERVENTION?

11. How much money is estimated to be lost in trading opportunities every year due to trade
barriers?
a. $1 billion
b. $10 billion
c. $100 billion
d. $200 billion
(c; p. 199; concept; Learning Objective 3; moderate)

12. Which of the following is an effect of administrative and bureaucratic procedures?

a. generates government revenue
b. slows down the import of products
c. blocks the entry of imported products
d. reduces the quantity of available goods
(b; p. 199; concept; Learning Objective 3; easy)

13. Which of the following terms is used to refer to the worldwide classification system used to
determine a products tariff?
a. harmonized tariff
b. protective tariff
c. revenue tariff
d. specific tariff
(a; p. 200; concept; Learning Objective 3; easy)

14. Tariffs which are ad valorem are ________.

a. based on the weight or size of the imported product
b. assessed as a percentage of the imported products value
c. intended to provide a steady flow of income for the government
d. levied on specific imported and exported products
(b; p. 200; concept; Learning Objective 3; moderate)

15. Mexico eliminated nearly all tariffs on product imports from the United States as a result of
which of the following?
a. FDI
b. WTO
c. GATT
d. NAFTA
(d; p. 201; concept; Learning Objective 3; moderate)

16. Low per-capita income and high import tariffs characterizes which of the following countries?
a. Australia
b. Canada
c. India
d. Japan
(c; p. 201; concept; Learning Objective 3; easy)

128
17. Which of the following is considered a major driver of market globalization?
a. tariff reductions
b. government subsidies
c. countervailing duties
d. prohibitive tariffs
(a; p. 201; concept; Learning Objective 3; moderate)

18. Nontariff trade barriers have increased in popularity in part because they ________.
a. generate profits for foreign firms
b. can be concealed from the WTO
c. are easy for governments to enforce
d. reduce smuggling along borders
(b; p. 202; concept; Learning Objective 3; moderate)

An import license can best be defined by which of the following?

e. an expensive requirement for new importing firms
f. a government fee to facilitate import processing
g. a complicated system of establishing quotas
h. a costly government permit to import goods
(d; p. 202; concept; Learning Objective 3; moderate)

19. The rules of origin requirement can best be defined as which of the following?
a. a voluntary quota in which a firm agrees to limit some exports
b. a formal permission must be obtained to import specific goods
c. a certain amount of production must occur within an economic bloc
d. a set number of exports must originate from either a bloc or a region
(c; p. 203; concept; Learning Objective 3; difficult)

20. Which of the following is a frequent problem in national customs agencies?

a. a shortage of customs agents in airports
b. inconsistent product classification
c. arbitrary tariffs and duties
d. customs agents who fail to understand contemporary trade issues
(b; p. 204; concept; Learning Objective 3; easy)

21. Which of the following is occasionally used to offset subsidies?

a. prohibitive tariffs
b. investment incentives
c. countervailing duties
d. antidumping duties
(c; p. 205; concept; Learning Objective 3; moderate)

129
22. Which of the following is an example of a government procurement policy?
a. requiring airline carriers to offer reduced rates for government travel
b. imposing additional import taxes on non-domestic made products
c. offering tax breaks to manufacturers that purchase domestic components
d. requiring government cars be purchased from domestic automakers
(d; p. 207; concept; Learning Objective 3; difficult)

GOVERNMENT INTERVENTION, ECONOMIC FREEDOM, AND ETHICAL CONCERNS

23. The Index of Economic Freedom uses all of the following criteria in its assessment except
________.
a. rule of law
b. infrastructure
c. level of trade barriers
d. level of business regulation
(b; p. 207; concept; Learning Objective 4; easy)

24. What is the primary ethical concern regarding the import of products from poor countries?
a. poor nations face higher tariffs than developed nations
b. nations lacking economic freedom cannot afford to export
c. emerging nations lack the revenue to pay high tariffs
d. impoverished countries face more import regulations
(a; p. 207; concept; Learning Objective 4; difficult; AACSB: Ethical Reasoning)

EVOLUTION OF GOVERNMENT INTERVENTION

25. All of the following occurred as a result of the Smoot-Hawley Tariff Act except ________.
a. bank closures
b. record high tariffs
c. normal trade relations
d. fewer farm exports
(c; p. 210; concept; Learning Objective 5; moderate)

26. The intended purpose of the General Agreements on Tariffs and Trade was to ________.
a. provide a forum for international trade issues
b. eliminate international tariffs and barriers
c. oversee enforcement of international tariffs
d. establish embargoes on countries that oppose global free trade
(d; p. 210; concept; Learning Objective 5; moderate)

130
27. Import substitution failed during the 1950s in Latin America because ________.
a. products manufactured domestically were not of the same quality as imports
b. protected enterprises required constant subsidizing and never competed globally
c. high quotas and tariffs did not generate enough revenue to support the government
d. local manufacturing firms required parts and labor from other nations
(b; p. 210; concept; Learning Objective 5; difficult; AACSB: Analytic Skills)

28. Each of the following nations enjoyed success as a result of export-led development except
________.
a. North Korea
b. Hong Kong
c. Taiwan
d. Thailand
(a; p. 210; concept; Learning Objective 5; easy)

29. Tariffs helped Japan rise from poverty after World War II by ________.
a. subsidizing automobile and shipbuilding firms
b. encouraging the development of importing firms
c. increasing revenue for national strategic policies
d. protecting the nations infant industries
(d; p. 210; concept; Learning Objective 5; moderate)

30. Approximately how many of the 150 nations that belong to the World Trade Organization are
classified as developing countries?
a. 40
b. 75
c. 115
d. 140
(c; p. 211; concept; Learning Objective 5; easy)

HOW FIRMS SHOULD RESPOND TO GOVERNMENT INTERVENTION

31. Which of the following entry strategies do most firms use if high tariffs are not an issue?
a. FDI
b. licensing
c. joint ventures
d. exporting
(d; pp. 212-213; concept; Learning Objective 6; moderate)

32. Firms use foreign trade zones in order to ________.

a. stimulate local economic growth and development
b. take advantage of favorable customs regulations
c. create employment opportunities for locals
d. meet quota demands established by the government
(b; p. 213; concept; Learning Objective 6; difficult)

131
33. Which of the following is a method used by some manufacturers to avoid paying high tariffs?
a. produce a small number of high-quality items
b. produce a large number of less expensive items
c. employ low cost workers in the export location
d. ship products to fewer international locations
(a; p. 214; concept; Learning Objective 6; difficult)

34. Many firms have successfully lowered trade and investment barriers by ________.
a. entering joint ventures with competitors
b. petitioning the World Trade Organization
c. lobbying foreign and domestic governments
d. obtaining advice from customs attorneys
(c; p. 214; concept; Learning Objective 6; moderate)

READING COMPREHENSION QUESTIONS

For each of the following choose the answer that most completely answers the question.

WHAT ARE THE INSTRUMENTS OF INTERVENTION?

Cotton Quota (Scenario)

Cotton growers in the nation of Zanzi export nearly 700,000 bales of cotton every year. Zanzi is
the home country for a fabric manufacturing facility that exports high-quality cotton fabric
around the world. The government imposed a quota of 1 million bales of cotton that can be
imported into Zanzi every year. The local fabric manufacturer is lobbying the government to
remove the quota on cotton.

35. Which of the following questions would be most important for government officials to evaluate
when considering the controversy over the cotton quota?
a. What would be the short-term effect of additional agricultural quotas?
b. What other nations utilize agricultural quotas and what are the effects?
c. What would be the cost of subsidizing the fabric manufacturing facility?
d. What will be the long-term effect of the cotton quota on the Zanzi economy?
(d; pp. 195-196; application; Learning Objective 3; difficult; AACSB: Analytic Skills)

36. Which of the following supports abolishing the cotton quota over maintaining it?
a. The cotton growers have a competitive edge over foreign cotton growers, and they are
profitable.
b. The fabric manufacturer can save money by moving to a country that does not impose
cotton quotas.
c. A competing fabric manufacturer is considering opening a production facility in Zanzi.
d. Global cotton prices have fallen in recent years and cotton fabric prices have increased.
(b; pp. 195-196; application; Learning Objective 3; difficult; AACSB: Analytic Skills)

132
37. Which of the following best supports maintaining the existing cotton quota?
a. Zanzi cotton growers are protected from cheaper cotton imports.
b. Zanzi cotton growers have an advantage when they export.
c. The local fabric manufacturer pays high prices for cotton.
d. The local fabric manufacturer uses mostly Zanzi-grown cotton.
(a; pp. 195-196; application; Learning Objective 3; difficult; AACSB: Analytic Skills)

38. Which of the following would most likely appease both sides of the issue?
a. subsidizing the fabric industry
b. initiating a local content requirement
c. implementing countervailing duties
d. imposing antidumping duties
(b; pp. 195-196; application; Learning Objective 3; moderate; AACSB: Analytic Skills)

EVOLUTION OF GOVERNMENT INTERVENTION

International Trade History (Scenario)

The history of international trade is the subject of a report presented by Patrick Hinojosa to his
international business class. Patrick addressed how the GATT impacted world trade, and how
trade barriers have gradually disappeared. He described the protectionist policies implemented by
Latin America during the 1950s. Patrick wrapped up his report with the explosive economies
characteristic of Singapore, Hong Kong, and Taiwan during the 1970s and the post-World War II
Japanese miracle.

39. Which of the following does Patrick most likely cite as the policy implemented in Latin
America which was intended to spur industrialization and economic growth?
a. export controls
b. import quotas
c. government subsidies
d. import substitution
(d; p. 210; application; Learning Objective 5; moderate; AACSB: Analytic Skills)

40. Patricks research most likely indicates which of the following as the reason for the rapid
economic growth achieved by Singapore, Hong Kong, and Taiwan?
a. development of export-intensive industries
b. expansion of import-driven industries
c. competitive public-private industries
d. protected subsidized industries
(a; p. 210; application; Learning Objective 5; moderate; AACSB: Analytic Skills)

133
41. In describing the Japanese miracle, Patrick most likely cites which of the following as the main
reason for the economic feat?
a. value-chain diversification
b. infant industry subsidies
c. infant industry protection
d. free trade reform movement
(c; p. 210; application; Learning Objective 5; moderate; AACSB: Analytic Skills)

HOW FIRMS SHOULD RESPOND TO GOVERNMENT INTERVENTION

Minimizing Trade Barriers (Scenario)

National Appliance Corporation (NAC) needs to build a new manufacturing facility to meet the
increasing demand for professional-grade appliances. NAC managers are considering building the
facility in Mexico but are hesitant because of the high tariffs involved. Another possible location
for the facility is India; however, the country also imposes high tariffs. Wherever NAC builds a
plant, parts will need to be imported from other nations.

42. Which of the following would be most important for NAC managers to consider when deciding
whether to recommend NAC build a facility in Mexico or India?
a. What types of permits are required for NAC to construct a manufacturing facility and
what are the building restrictions?
b. How would appliance parts and finished products be categorized when passing through
customs?
c. Does either nation have a successful history of manufacturing and importing appliance
products?
d. What entry strategies are available in both countries which would allow NAC to minimize
import barriers?
(d; pp. 212-213; application; Learning Objective 6; difficult; AACSB: Analytic Skills)

43. Which of the following best supports a decision to build a plant in Mexico instead of India?
a. foreign trade zones along Mexicos border
b. strict product liability laws and regulations
c. Mexicos close ties with the United States
d. availability of low-cost labor in Mexico
(a; p. 213; application; Learning Objective 6; difficult; AACSB: Analytic Skills)

44. Which of the following would most likely ensure that NAC paid the lowest tariff possible on
the appliances it exports around the world?
a. reduced appliances in production
b. more high-quality appliances
c. accurate product classification
d. balanced production capacity
(c; pp. 213-214; application; Learning Objective 6; moderate; AACSB: Analytic Skill)

134
International Business: The New Realities, 3e (Cavusgil)
Chapter 8 Government Intervention in International Business

31) ________ is at odds with free trade, the unrestricted flow of products, services, and capital
across national borders.
A) Lower-cost import
B) Government intervention
C) FDI
D) Factors of production
Answer: B

32) Which of the following situations is an example of country risk?

A) Fiesta Corp. is an automobile manufacturer based in the U.S. The company's negotiation
attempts with China to open a manufacturing factory in Beijing failed owing to cultural
differences.
B) Frostees Inc. is a food and beverages company based in the U.S. Its attempt to set up an outlet
in Thailand failed primarily owing to a misinterpretation of the memorandum of understanding
by a potential business partner in Thailand.
C) Alpha Corp., a rice manufacturer based in Pakistan, suffered losses when the U.S. Department
of Commerce decided to impose tariffs on the import of paddy rice to avoid competition for the
domestic industry.
D) Tamiaz LLC is a U.S. based manufacturer of clothing with outlets in China, Vietnam, and
India. The company incurred a loss due to delayed payments from India owing to fluctuations in
the currency exchange rates.
Answer: C

33) The purpose of protectionism is to protect ________.

A) domestic industries from foreign competitors
B) foreign firms from domestic competition
C) domestic exports from high production costs
D) foreign and domestic firms from labor unions
Answer: A

34) ________ are checkpoints at the ports of entry in each country where government officials
inspect imported products and levy tariffs.
A) Nontariff trade barriers
B) Customs
C) Quotas
D) Subsidies
Answer: B

135
35) A government policy that impedes trade through means other than explicit tariffs is known as
a(n) ________.
A) investment incentive
B) subsidy
C) maquiladora
D) nontariff trade barrier
Answer: D

36) Which of the following refers to an often-used form of nontariff trade barrier?
A) premium
B) subsidy
C) quota
D) grant
Answer: C

37) A quantitative restriction on specific imports for a set period of time is referred to as
________.
A) tariff
B) quota
C) investment barrier
D) country risk
Answer: B

38) Which of the following is an example of nontariff trade barrier?

A) Gayle Inc. is a U.S.-based retailer that imports cosmetic products manufactured in Thailand.
These products pass through U.S. customs and are subject to a 5 percent import duty.
B) The U.S. imports chocolates manufactured in Belgium that cost $65 a box with taxes.
C) The U.S. Department of Commerce announced that white sugar imports will be limited to 7,500
million tons.
D) Spices imported from India to the U.S. for sale in the domestic market are subject to a 10
percent import duty.
Answer: C

39) Which of the following is NOT a country risk in international business?

A) government policies that favor domestic firms
B) investment barriers
C) government protectionism
D) currency exchange rate
Answer: D

40) Which of the following is often a result of protectionist policies?

A) price inflation
B) increased choices for buyers
C) easy availability of products
D) high incentive to improve quality
Answer: A

136
41) Governments impose offensive barriers to ________.
A) protect domestic industries
B) promote national security
C) increase employment
D) safeguard the interests of special interest groups
Answer: C

42) Governments impose defensive barriers to ________.

A) generate tax revenues
B) increase employment
C) pursue strategic policy objectives
D) promote national security
Answer: D

43) Blocking imports ________.

A) increases the availability of raw materials
B) increases the availability of products sold in the home market
C) reduces the availability of products sold in the home market
D) decreases the cost of products sold in the home market
Answer: C

44) Which of the following is true with regard to protectionism?

A) It increases the availability of raw materials for domestic industries.
B) It decreases the cost of products sold in the home market.
C) It increases the availability of products sold in the home market.
D) It can trigger retaliation from foreign governments, which reduces sales prospects for exports.
Answer: D

45) Which of the following statements is true about protection of an infant industry?
A) Governments can impose temporary trade barriers on foreign imports to ensure that young
firms gain a large share of the domestic market.
B) Such protection is easy to remove.
C) Protected companies become more efficient and produce products with lower prices.
D) Protecting infant industries rarely allows countries to develop a modern industrial sector.
Answer: A

46) ________ refers to a government measure intended to manage or prevent the export of certain
products or trade with certain countries.
A) Quota
B) Export control
C) Customs
D) Subsidy
Answer: B

137
47) Governments impose export controls for the purpose of ________.
A) improving available opportunities for domestic sales
B) boosting derived demand in the domestic market
C) preventing the export of certain products to certain countries
D) boosting derived demand in foreign markets
Answer: C

48) Which of the following is an example of an offensive rationale for government intervention?
A) The government of Erbia imposes trade restrictions on the export of plutonium to certain
countries.
B) The government of Berylia imposes a trade barrier to curtail the import of low-priced products
from manufacturers in the developed economies.
C) The government of Argonia imposes investment barriers to safeguard special interest groups.
D) The government of Rhodia requires foreign companies to enter its huge markets through joint
ventures with local firms.
Answer: D

49) Advocates of government intervention in international trade argue that blocking imports will
________.
A) reduce the availability of products sold in the home market
B) protect home-country employment opportunities
C) encourage manufacturers to outsource jobs
D) limit intellectual property theft
Answer: B

50) The Chinese government's policy of requiring foreign firms to enter the Chinese market via
joint ventures is intended to ________.
A) limit the amount of FDI
B) create jobs for Chinese workers
C) protect China's national security
D) stimulate foreign investment
Answer: B

51) The United Nations estimated that trade barriers alone cost developing countries ________ in
lost trading opportunities with developed countries every year.
A) $100 billion
B) $200 billion
C) less than $100 billion
D) more than $500 billion
Answer: D

52) Typically, administrative and bureaucratic procedures ________.

A) speed up the investment activities of firms
B) slow the import of products or services
C) boost investment activities
D) harm late importers
Answer: B

138
53) ________ refer to rules that limit the ability of foreign firms to invest in certain industries or
acquire local firms.
A) Quotas
B) Regulations and technical standards
C) FDI and ownership restrictions
D) Administrative and bureaucratic procedures
Answer: C

54) In Cadmia, foreign-owned automobile manufacturing companies must be managed by a

Cadmian national and most board members must be Cadmian citizens. This exemplify ________.
A) FDI and ownership restrictions
B) administrative and bureaucratic procedures
C) Regulations and technical standards
D) Anti-dumping duty
Answer: A

55) Products are classified under about 8,000 different unique codes in the ________ schedule, a
standardized system used worldwide.
A) harmonized tariff
B) protective tariff
C) revenue tariff
D) specific tariff
Answer: A

56) Tariffs that are ad valorem are ________.

A) based on the weight or size of the imported product
B) assessed as a percentage of the imported product's value
C) intended to provide a steady flow of income for the government
D) charged regardless of the imported product's value
Answer: B

57) Under the ________, Canada, Mexico, and the United States have eliminated nearly all tariffs
on product imports from each other.
A) APEC
B) FTAAP
C) GATT
D) NAFTA
Answer: D

58) ________ represent a major driver of market globalization.

A) Continuous reductions
B) Export controls
C) Import controls
D) Prohibitive tariffs
Answer: A

139
59) Nontariff trade barriers have increased in popularity partly because they ________.
A) generate profits for foreign firms
B) are easier to conceal from the WTO
C) restrict trade by imposing direct tax
D) have been fairly successful in eliminating smuggling along international borders
Answer: B

60) An import license refers to a(n) ________.

A) tax charged on an imported product whose price is below usual prices in the local market
B) list of complex procedures imposed on importers that hinder trade and investment
C) complicated system of establishing quotas
D) government authorization granted to a firm for importing a product
Answer: D

61) The so-called ________ specifies that a certain proportion of products and supplies, or of
intermediate goods used in local manufacturing, must be produced within the bloc.
A) safe harbor
B) local content requirement
C) rules of origin requirement
D) ad valorem tariff
Answer: C

62) Which of the following is a frequent problem in national customs agencies?

A) a shortage of customs agents in airports
B) ambiguous product classification
C) arbitrary tariffs and duties
D) lack of understanding of contemporary trade issues among customs agents
Answer: B

63) Restrictions on the outflow of hard currency from a country or on the inflow of foreign
currencies is called ________.
A) antidumping duty
B) currency appreciation
C) currency control
D) currency depreciation
Answer: C

64) Governments sometimes retaliate against subsidies by imposing ________, tariffs on products
imported into a country to offset subsidies given to producers or exporters in the exporting
country.
A) local content requirements
B) investment incentives
C) countervailing duties
D) antidumping duties
Answer: C

140
65) Which of the following may allow a manufacturer to practice dumping?
A) countervailing duties
B) subsidies
C) currency control
D) import license
Answer: B

66) Which of the following exemplifies local content requirements?

A) Titania charges a 27 percent tariff on imported dairy products.
B) At least 40 percent of the value of all computers assembled in Titania must be from parts or
other inputs produced in Titania.
C) Titania bans imports of firearms.
D) Titania imposes extensive inspections and bureaucratic procedures on the import of alcoholic
beverages.
Answer: B

67) ________ are transfer payments or tax concessions made directly to foreign firms to entice
them to invest in the country.
A) Investment incentives
B) Antidumping duties
C) Countervailing duties
D) Quotas
Answer: A

68) By adopting procurement policies, governments ________.

A) incentivize dumping
B) increase the costs of production of domestic industries
C) alienate domestic industries
D) restrict purchases to home-country suppliers
Answer: D

69) Which of the following is true about a nation's level of economic freedom?
A) One way of evaluating the effects of government intervention is to examine each nation's level
of economic freedom.
B) Economic freedom reflects the estimated value of the total worth of a country's production and
services.
C) Economic freedom flourishes only in the total absence of governmental intervention and
regulation.
D) All advanced economies and emerging markets are characterized by a low degree of economic
freedom.
Answer: A

141
Cotton Quota (Scenario)
Cotton growers in the nation of Zanzi export nearly 700,000 bales of cotton every year. Zanzi is
the home country for a fabric manufacturing facility that exports high-quality cotton fabric
around the world. The government imposed a quota of 1 million bales of cotton that can be
imported into Zanzi every year. The local fabric manufacturer is lobbying the government to
remove the quota on cotton.

70) Which of the following questions would be most important for government officials to evaluate
when considering the controversy over the cotton quota?
A) What would be the short-term effect of additional agricultural quotas?
B) What other nations utilize agricultural quotas and what are the effects?
C) Does the government of Zanzi impose heavy duties on dumping?
D) What will be the long-term effect of the cotton quota on the Zanzi economy?
Answer: D

71) Which of the following most supports abolishing the cotton quota over maintaining it?
A) The cotton growers have a competitive edge over foreign cotton growers, and they are
profitable.
B) The fabric manufacturer, a prime contributor to the nation's annual revenue, can earn better
returns by shifting to another country that does not impose cotton quotas.
C) A competing fabric manufacturer is considering opening a production facility in Zanzi.
D) The price of cotton fabric has remain unchanged over the last decade.
Answer: B

72) Which of the following best supports maintaining the existing cotton quota?
A) Zanzi cotton growers are protected from cheaper cotton imports.
B) Zanzi cotton growers have an advantage when they export cotton fabric to other countries.
C) The local fabric manufacturer pays high prices for cotton.
D) The local fabric manufacturer uses mostly Zanzi-grown cotton.
Answer: A

73) Which of the following criteria is used to evaluate a country's Index of Economic Freedom?
A) environmental wellness
B) military capability
C) level of trade barriers
D) income of non-residents located in that country
Answer: C

74) Which of the following countries has the highest degree of economic freedom?
A) Australia
B) China
C) Brazil
D) Venezuela
Answer: A

142
75) Which of the following countries has the lowest degree of economic freedom?
A) South Korea
B) Mexico
C) North Korea
D) Botswana
Answer: C

76) What is the primary ethical concern regarding the import of products from poor countries?
A) Higher tariffs hurt poor nations more than developed nations.
B) Nations lacking economic freedom cannot afford to export.
C) Emerging nations use government intervention to protect domestic industries.
D) Lack of subsidies adversely affect poor countries.
Answer: A

77) In 1938, the United States passed the Smoot-Hawley Tariff Act, which ________.
A) opened foreign markets for U.S. agricultural products
B) led to the consolidation of the U.S. banking system
C) instituted strict regulations to contain intellectual property theft
D) raised U.S. tariffs to near-record highs of more than 50 percent
Answer: D

78) Import substitution failed during the 1950s in Latin America because ________.
A) domestic companies felt exposed to the threats of foreign competition
B) protected enterprises required constant subsidizing and never competed globally
C) high quotas and tariffs did not generate enough revenue to support the government
D) local manufacturing firms required parts and labor from other nations
Answer: B

79) In the 1950s, ________ adopted protectionist policies aimed at industrialization and economic
development.
A) Latin America
B) Singapore
C) Africa
D) South Korea
Answer: A

80) Which of the following Asian countries had launched an ambitious program of
industrialization and export-led development that contributed to its rise from poverty in the 1940s
to one of the world's wealthiest countries by the 1980s?
A) Indonesia
B) China
C) Japan
D) India
Answer: C

143
81) Which of the following was the first major effort to systematically reduce trade barriers
worldwide?
A) WIPO
B) GATT
C) NAFTA
D) WTO
Answer: B

International Trade History (Scenario)

The history of international trade is the subject of a report presented by Patrick Hinojosa to his
international business class. Patrick addressed how the GATT impacted world trade, and how
trade barriers have gradually disappeared. He described the protectionist policies implemented by
Latin America during the 1950s. Patrick wrapped up his report by citing the rapid economic
growth of Singapore, Hong Kong, and Taiwan during the 1970s and the post-World War II
Japanese miracle.

82) Which of the following is Patrick most likely to cite as the policy implemented in Latin
America that was intended to spur industrialization and economic growth?
A) export controls
B) import quotas
C) government subsidies
D) import substitution
Answer: D

83) Patrick's research is most likely to indicate the ________ as the reason for the rapid economic
growth achieved by Singapore, Hong Kong, and Taiwan from the 1970s onward.
A) development of export-intensive industries
B) expansion of import-driven industries
C) chiefly monopolistic nature of the markets
D) rise of subsidized industries
Answer: A

84) Which of the following best describes the "Japanese miracle" cited by Patrick in his report?
A) Japan's rise as a major nuclear power in the latter half of the twentieth century
B) the phenomenal success of foreign MNCs in Japan
C) Japan's rise from poverty in the 1940s to one of the world's wealthiest countries by the 1980s
D) the success of small firms in Japan prior to the 1940s
Answer: C

85) Which of the following entry strategies do most firms use in the absence of high tariffs?
A) FDI
B) licensing
C) joint ventures
D) exporting
Answer: D

144
86) Which of the following is a method used by some manufacturers to avoid paying high tariffs?
A) assemble products in the target market
B) produce a large number of less expensive items in the target market
C) employ highly skilled workers in the export location regardless of the cost
D) ship products to fewer international locations
Answer: A

87) Firms use foreign trade zones to ________.

A) consolidate market monopolies
B) assemble foreign dutiable materials and components into finished products, which are then re-
exported
C) create employment opportunities for the local people
D) meet quota demands established by the government
Answer: B

88) A ________ is an area within a country that receives imported goods for assembly or other
processing and subsequent re-export.
A) single market
B) trade bloc
C) foreign trade zone
D) common market
Answer: C

Minimizing Trade Barriers (Scenario)

National Appliance Corporation (NAC) needs to build a new manufacturing facility to meet the
increasing demand for professional-grade appliances. NAC managers are considering building the
facility in Mexico but are hesitant because of the high tariffs involved. Another possible location
for the facility is India; however, the country also imposes high tariffs. Wherever NAC builds a
plant, parts will need to be imported from other nations.

89) Which of the following would be most important for NAC managers to consider while taking a
decision in favor of building a facility in Mexico or India?
A) Has NAC engaged in dumping in the past?
B) How would appliance parts and finished products be categorized when passing through
customs?
C) Is employee empowerment culturally favored in Mexico and India?
D) What entry strategies are available in both countries which would allow NAC to minimize
import barriers?
Answer: D

145
90) Given the high trade barriers in Mexico, the management of NAC is most likely to consider
________ to be an inappropriate entry strategy.
A) exporting
B) FDI
C) joint ventures
D) licensing
Answer: A

91) Which of the following must NAC ensure in order to reduce exposure to trade barriers?
A) reduced production
B) strong emphasis on quality
C) accurate product classification
D) obtaining patents for inventions
Answer: C

146